The US dollar remained flat during the day, with market focus shifting towards the Federal Open Market Committee (FOMC) meeting later in the day.
We saw some risk aversion at the beginning of European trading, which helped with this, in light of the collapse of the Turkish lira. USD/TRY rose to a new record high of 42 liras before now falling to around 38 liras, while remaining up almost 4% on the day.
The rise above the 40 lira level led to safe investment flows in the markets, with the dollar, yen and Swiss franc all seeing purchases for some time. The EUR/USD pair fell to 1.0875 and the EUR/CHF pair fell to 0.9540, before recovering to 1.0915 and 0.9590 respectively.
The USD/JPY pair also saw some decline after the remarks of Bank of Japan Governor Ueda, which did not offer much overall from my point of view. However, the pair initially rose to 150.00 before selling pressure returned to 149.15 amid a decline in risk appetite. This is before recovering to 149.75 currently.
Commodity currencies remain lagging behind, unable to recover, with the AUD/USD still down 0.4% to 0.6335 at the moment.
As for stocks, U.S. futures fell for a while and pared their early gains, but now they maintain a slight rally during the day. However, the mood remains fragile, and we will see what Wall Street has to offer next alongside the Federal Reserve.
In other markets, gold continues to shine as it gradually rises, with buyers testing a level above $3,040 during the session. Now, it’s up to Powell and partners to provide some guidance to the markets during the next session.
Cautious expectations for the Federal Reserve and its impact on the dollar
Market prices indicate some adjustments in today’s Fed statement, but we believe Chairman Powell will want to see compelling evidence of a slowing economy, and will remain cautious for now.
The US dollar could rebound if we are correct in our recommendation to keep the average dot chart unchanged today. However, macroeconomic sentiment stability remains essential to sustain the recovery of the US dollar.
USD: The Federal Reserve may challenge dove bets for now
The US dollar enters the day of the Federal Open Market Committee (FOMC) meeting with significant bearish momentum. Despite Treasury Secretary Scott Biscent’s attempts to calm recession fears, high-frequency indices have continued to fall, and still prefer to stay away from US assets.
The latest Bank of America fund manager survey showed a record shift from US to European equities, and 69% of respondents believe that US exceptionalism is over. Another positive outcome for the dollar is the significant increase in pessimistic views on global growth.
In the near term, the FOMC’s announcement today is likely to be the best chance for the US dollar to recover. As discussed in our forecast, the chances of a rate cut are nil, but the recent repricing of the US dollar curve suggests that the market expects some protectionist adjustments to future guidance. We are not convinced of that.
The Fed has a mandate on inflation and employment, neither of which has fallen short enough to justify its shift toward protectionism. Growing pessimism about growth and consumption still needs to face the tough data test, and if the US administration can afford a stock market correction, the Fed is likely to be able to do so as well.
EUR/USD falls ahead of Federal Reserve’s interest rate decision
The EUR/USD pair fell sharply below 1.0900 in the European session on Wednesday, after hitting a five-month high near 1.0955 the previous day. The main currency pair is falling as the US dollar performs strongly ahead of the Federal Reserve’s interest rate decision at 18:00 GMT. The US dollar index (DXY) rose), which measures the value of the greenback against six major currencies, to around 103.70 after returning to a five-month low of around 103.20 on Tuesday.
According to CME Fed Watch, the Fed will almost certainly keep interest rates steady in the range of 4.25%-4.50%. This will be the second consecutive meeting in which the Fed has kept interest rates unchanged.
Traders’ confidence grew on Wednesday that the Federal Reserve will remain intact, as officials argued in favor of a “wait-and-see” approach until President Donald Trump’s economic vision becomes clear.
Market participants predict that Donald Trump’s tariff policies could lead to renewed inflationary pressures in the near term, as U.S. importers will bear the impact of the import duty hike and pass on this impact to consumers.
Besides the interest rate decision, investors will also focus on the Federal Reserve’s bullet chart, which shows policymakers’ collective expectations for medium- and long-term interest rate expectations. At the December meeting, Fed officials expected two rate cuts in 2025.
Markets will also be affected by growth and inflation expectations, but if we are correct in our point forecasts, and Federal Reserve Chairman Jerome Powell maintains his cautious tone on monetary policy easing, the dollar should be able to recover. However, to achieve a sustainable recovery of the US dollar, stabilization of US macroeconomic sentiment must begin.
